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Tax credits stand among the highly useful ways to optimize your overall tax burden. They act as additional reductions on the regular taxes you pay. Since it is an extra benefit, it is better than actual deductions in many ways. One of the highly popular types of tax credits in the US tax landscape is the child tax credit (CTC). Raising children is indeed a costly affair. Such a child tax credit is one of the benefits that help you save some extra bucks. Many are unlocking this tax credit opportunity, as the federal authorities have allocated about $15 billion for this credit. Despite this, a few are still unaware of how it works. Considering how fast the claims for this credit are escalating, in this article, we are keen to tell you how much you shall save and who qualifies to claim the child tax credit. Keep reading to see what this child tax credit entails.

What is a Child Tax Credit?

So, before we jump into overviewing the details, let’s look at what precisely a child tax credit means. It is a tax benefit ceded to American taxpayers for each qualifying dependent child below a specified age. This credit is envisaged to diminish your debts to the IRS despite your child care expenses like day-care, dependent care, and summer care or after educational care. Formulated to make lives more straightforward, it rallies around to support American taxpayers, particularly in these difficult times. Currently, it has got protracted by the American Rescue Plan Act of 2021. One can estimate that the new child tax credit rules shall condense the count of the average American children experiencing poverty by 45%.

When the advanced payment credit is scheduled on Sept 15, the credit will grow to accommodate $3,600 in 2021. Moreover, it has been streamlined to create a reliable pool of income to control poor-quality living conditions. IRS states that over 36 million American families can qualify for the child tax credit in 2021.

Responding to the economic downturn induced with the emergence of COVID-19, the government has allowed the distribution of a portion of the child tax credit as advance cash payments for the first time. Consequently, you will be backed by a monthly credit of $250 (in case your dependent child is below 18) or $300 (in case your dependent child is below 5) Per child from July to December this year.

How to Qualify for the Child Tax Credit?

To become eligible for the child tax credit, you need to be a qualifying taxpayer, and the child needs to comply with the tax-law requisites. If the taxpayer pays more than half of their income as financial support during the tax year, they can claim CTC without hassles. You can unravel the benefit for siblings, grandchildren, nieces, nephews, adopted or foster children, provided they meet the dependency, age, citizenship, and residency prerequisites.

Only one taxpayer can apply for the CTC, and in case of joint custody, both parents need to reach an agreement when both are willing to file for the benefit. If you have primary custody, then you can directly claim the credit. On the contrary, a qualified child needs to meet the age and residency criteria before applying. The claiming person should be living with the child for more than half of the tax year.

If you are aiming for the advanced child tax credit payment in 2021, you and your spouse must cater to the following conditions if you file for a joint return.

  • Submitted a 2019 or 2020 federal tax return with the IRS and should have already requested the Child Tax Credit on the return.
  • Delivered all your updated information to IRS in 2020 to get the Economic Impact Payment through the Non-Filers: Enter Payment Info here is the tool
  • You have your main home in the US for more than half the year of the given tax season. This home should be located in any of the 50 states and the District of Columbia. You can also claim it on a joint return with a spouse who has their main home in America for more than half of the relevant tax year.
  • Suppose you have a qualified child who turns 17 at the end of 2021. He should possess a social security number for any advance claims.
  • You should comply with certain income limits.

To file advance child tax credit for low-income families, you can utilize this tool provided by the IRS.

Revised criteria for claiming Child Tax Credit in 2021

Let’s now take a look at the qualification criteria for this year 2021, and evaluate how it differs from the previous years.

Prior to 2021
  • The eligible age requirement of children before was below 17. Any child that reaches this age by the end of the tax year gets labeled as a qualified dependent child.
  • You can claim $2,000 credit for each qualified child below the age of 17.
  • You can get a $1,400 refund if you meet specific income requirements.
  • If your modified adjusted gross income exceeds the income thresholds, the credit begins to phase out by $50 for each $1,000.
  • The income threshold for the first and second phase-out rules are:
  • a. $400,000 for married filing jointly, and

    b. $200,000 for all other filing statuses.

In 2021
  • Qualified children for this tax season are those who are aged under 18 at the end of the tax year.
  • Parents with eligible dependent children under age 5 at the end of the year are entitled to get a credit of $3,600.
  • Children from the age of 6 to 17 at the conclusion of the tax year can claim $3000 as Child Tax Credit.
  • Besides, you can claim the amount of credit, unless and until the taxpayer or the spouse who files jointly has their main home in America for more than half a year of the tax season.
  • If the modified adjusted gross income surpasses the income threshold, then the extra credit of $1,000 or 1,600, based on your child’s age, will also be reduced by $50 for every $1,000 additional income.
  • You can apply for the comprehensive benefits if your modified adjusted gross income is under $75,000 for singles, $112,500 for the Head of household, and $150,000 for the Married filing jointly.

How to calculate Child Tax Credit?

Consider an example to comprehend the calculation better. Mr. Alpha and Mrs. Beta are filing tax returns jointly for their child, who will be of the age 4 at the end of the year 2021. The adjusted gross income is $1,75,000 in the year 2020 and 2021.

Thus,the child tax credit for 2020 is $2,000. To calculate for 2021, the child tax credit is $ 2,350 ($3600 – (50*175000-150000/1000)).

What does the IRS have in store for the American taxpayers who want to claim the child tax credit?

The changes brought forth in the conditions for claiming child tax credit will back families with additional financial advantages. Further, the IRS has promised to pay half of the total credit amount in advance monthly payments from July 15 onwards. To place an extra boost, you can claim the rest of the credit when you file your 2021 income tax return. The IRS will decide the credit based on the conditions like taxpayer’s filing status, modified adjusted gross income, and the number of eligible children from 2020 tax returns (or from 2019 if you haven’t filed for the year 2020). The IRS will decide the credit. In addition to this, for advance payments, the IRS will automatically enroll you without many complications.

According to the new changes, the IRS provides two options to taxpayers:

  1. Choose not to participate in the advanced payments option or
  2. Deliver well-revised information to anticipate the actual credit that you will receive in 2021.

Whatever the IRS determines, it will send a final call or notice to every taxpayer who will obtain the advance payments so that you can devise a plan to merge it on their 2021 tax return.

File your taxes and duly claim the child tax credit with Infinity Globus!

Considering all the legalities and requisites, you must meet, filing your tax returns while claiming your child tax credit can be exhausting. On the contrary, if you are missing any payments or incorrect information is furnished, it can be arduous to get the CTC you deserve. But, with adequate professional help, you can seamlessly claim the credit and get the advantage within a stipulated time.

At Infinity Globus, we make it easy and inexpensive for CPA firms to manage their tax preparation needs. Our tax credit experts back you with the necessary tools and consultations to bring the maximum advantage at your disposal. You no longer have to sweat about missing the deadlines and leaving out the eligible credits and deductions of your diverse clients. We prioritize your benefit and have tailored solutions brewed to fit your circumstances. Contact us to know more!

Shared By: Devesh Prajapati, Tax Senior at Infinity Globus
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